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Despite a flat net profit growth in the second quarter of 2012-13, analysts are bullish on IL&FS Transportation Networks. This is because the growth was only due to a spike in the interest cost, which went up by 66% on a year-on-year basis. The strong execution in annuity projects, where the interest cost during the construction period is expensed and not capitalised, is the main reason for the spurt. Apart from this, other second quarter numbers point to a stable growth.

IL&FS Transportation showed a revenue growth of 9% in the second quarter on a year-on-year basis because of the steady execution in the projects under construction. Similarly, a 57% jump in toll/annuity revenues helped the company improve its EBITDA margin by 460 basis points y-o-y. Due to the completion of several projects, the company's revenue from toll/annuity are expected to quadruple over the next five years.

Steady execution coupled with a robust order book—IL&FS Transportation's order book size stands at Rs 10,900 crore—provides clear visibility about its future earnings potential in the next two to three years. The company is a focused road sector player and it was incorporated in 2000 to spearhead the IL&FS group's initiative in the PPP space in the surface transportation sector. While 60% of its order book is contributed by NHAI projects, 33% are non-NHAI road projects. This means only 7% of its order book is non-road projects. The firm expects more orders in the second half when the pace of NHAI's awarding activity increases.

The ongoing economic slowdown and tight liquidity condition is reducing competition in the road build, operate and transfer (BOT) projects, and this in turn will help financially sound companies like IL&FS Transportation. Its diversified and balanced infrastructure portfolio, with a pan-India presence, provides greater stability to future revenue and cash flow.

The stocks from the infrastructure space will do well once the expected fall in interest rate starts materialising. With good parentage, high quality management, asset light model, strong competitive positioning and balance sheet, IL&FS Transportation should be able to tide over the current difficult environment. Therefore, the company is one of the better candidates to invest in a highly fragmented road sector now. The company is looking to monetise the matured annuity projects through bond issuance and this strategy is expected to pick up in the coming quarters, when the interest rates fall significantly.

Selection methodology: We pick the stock that has shown maximum increase in consensus analyst rating during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in rating indicates that the analysts are becoming more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks which were covered by at least 10 analysts.